The Department of Finance (DOF) has sought to allay concerns over the government's fiscal reforms, saying additional tax deductions and other "superior" incentives actually await qualified firms under Package 2 of the Comprehensive Tax Reform Program.
“The fear-mongering about the removal of incentives should stop. Package 2 will actually give superior incentives for the right reasons, such as the creation of good jobs, investment in research and development, and expansion in the countryside among others,” Finance Undersecretary Karl Kendrick Chua said in a statement.
Under the corporate income tax bill, these types of activities will be able to claim additional tax deductions, Chua said.
Additional tax deductions will be for:
Labor cost (additional incentive of up to 50% on direct labor expense),
Training cost (companies that invest in upgrading the skills of their Filipino employees may receive an additional deduction of up to 200% of the cost of their workers’ trainings, or double the 100% deduction given now),
Purchases from local suppliers (up to an additional 50% on top of the 100% deduction now allowed on the purchase and use of inputs from domestic suppliers, which will benefit local industries and producers),
Infrastructure development (a deduction of up to 100% on expenses for public infrastructure, utilities, irrigation, and drainage),
Research and development (up to an additional 100% or double the current 100% deduction on research and development (R&D) costs by R&D firms, which encourages innovation in such firms as semiconductor and tech companies), and
Accelerated depreciation allowance (companies are allowed to depreciate buildings and machinery directly used in qualified projects at an accelerated rate of 10% and 20%, respectively, allowing them to recover the cost of these investments more quickly).
“For example, Package 2 allows an additional deduction of up to 50% on direct labor expense. This means that for every job created, companies can deduct up to 150% of direct labor expense, compared to just 100% in the present regime,” Chua said.
This particular incentive would benefit labor-intensive industries like manufacturing and the information technology - business process outsourcing (IT-BPO) sector.
Package 2 of the CTRP lowers the corporate income tax (CIT) rate gradually to 20% from the current 30%.
“When you look at the changes we are making, it’s easy to agree with the thinking behind it,” Chua said. “Incentives are meant to encourage positive behavior, and we want to make sure our incentive system benefits firms whose activities are beneficial to the Philippines like job creation and training.”
Moreover, business losses incurred during a company’s first three years of commercial operation can be deducted from gross income within the next five consecutive taxable years from the year when such losses were incurred, he said.
This enhanced net operating loss carry-over (NOLCO) gives firms more time to recover their initial losses, Chua said.
“We are also introducing an allowance which encourages firms to reinvest their profits into registered projects, or the reinvestment allowance. This will allow firms to claim up to 50 percent of profits reinvested into registered projects as a deduction for income tax purposes within five years from the time of reinvestment,” Chua said.
“We see this as being useful to companies located in less-developed or far-flung areas, where their operations will benefit from the infra they build, while they can deduct part or all of this as a tax expense,” he added.
The Philippines granted an estimated P1.12 trillion in tax incentives and exemptions to 3,150 companies from 2015 to 2017, according to the DOF.
Such foregone revenues include income tax incentives, tax incentives on customs duties and tax incentives on import value added tax (VAT).
Under the current system, a select group of some 3,000 companies, including those on the elite list of Top 1,000 corporations, enjoy incentives that allow them to pay discounted tax rates of between 6% to 13% of net income only, while most SMEs pay the regular 30%. (Ventures Cebu)